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Wall St. Slides, Fearing Return to a Recession

One by one on Friday, markets sank lower in Asia, Europe and then the United States. Above, the floor of the New York Exchange. Credit
Jin Lee/Bloomberg News

Investors, who had started the week reassured by the huge rescue of Europe’s indebted nations, expressed second thoughts on Friday, sending markets lower and further devaluing the euro on concerns that the austerity measures required by the bailout would stunt the Continent’s already anemic economic growth.

The euro fell to its lowest level in 18 months, and bank stocks on both sides of the Atlantic took a beating.

Investors seemed fearful that the $957 billion bailout package for Greece and other nations, while providing short-term protection against default, might drag out the economic pain and hurt the financial system in the process.

A continued hammering of the euro would make European exports cheaper, but the side effect would be weaker American exports, potentially dragging the United States — and the rest of the world — back toward recession.

“What you get is markets worrying about a whole cascading of weakness stemming from Europe being transmitted through the euro to the United States,” said Martin Murenbeeld, chief economist at DundeeWealth Economics in Toronto.

The Treasury’s 10-year note rose 20/32, to 100 12/32. The yield fell to 3.45 percent, from 3.53 percent late Thursday.

Bank stocks led the market decline, mainly over worries about Europe. Another factor might have been the Senate’s approval of a proposal on Thursday that could cut bank revenue by imposing limits on fees they can charge businesses to process debit card transactions.

The Senate also approved an initiative to end reliance on major credit rating agencies, putting further pressure on financial stocks.

Last Friday, United States markets gave back all their gains for the year amid the immediate concerns over European defaults. Then on Monday, they roared back at the opening bell on the news of the nearly trillion-dollar intervention, sending the Dow up 404.71 points.

Despite Friday’s losses, the Dow still managed to end the week up 239.73 points and is up 1.84 percent so far this year.

The S.& P. 500 finished 24.8 points higher for the week and is up 1.85 percent so far this year. The Nasdaq was up 81.21 points for the week and is up 3.42 percent so far this year.

In European trading on Friday, the Euro Stoxx 50 index of blue chips ended the session down 3.7 percent. In Paris, stocks slumped 4.6 percent; in London, the FTSE 100 lost 3.1 percent; and in Germany, the benchmark DAX index lost 3.1 percent of its value. The stock market in Spain fell 6.6 percent.

The euro had rallied briefly to start the week, signaling initial enthusiasm about the rescue package. But then it dropped steadily as the week wore on and fell again on Friday, to $1.2385.

Since the start of the year, the currency has fallen 13 percent against the dollar and 14 percent against the yen.

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Economists have begun worrying that the dollar’s appreciation might push up the price of American exports to Europe enough to place a further drag on growth in the United States.

The sharp worldwide market decline came only five days after the European Union and the International Monetary Fund hoped their package would signal a “shock and awe” commitment to ending the Continent’s crisis.

But economists said that while the package had eased concerns that countries like Greece would encounter trouble in rolling over old debts or borrowing new money, it had done nothing to help them grow.

“It’s not a game changer, just a game extender,” said Jim Caron, the global head of interest rate strategy at Morgan Stanley.

As far as the markets are concerned, Mr. Caron said, “It does not fix the problem of whether Europe will be able to climb out of this hole.”

There was also a growing worry Friday about how governments would find the $957 billion to pay for the rescue package, economists said, and a growing suspicion that central banks might eventually resort to allowing inflation to lessen groaning debt loads.

The European Central Bank agreed to help calm the financial turmoil by buying government bonds for the first time in its history this week.

Some economists regard that step as a troubling departure from the bank’s mandate to focus solely on price stability, and as a result is adding to the pressures undermining the euro.

“The reputation of the E.C.B. has been dented,” said Jörg Krämer, chief economist at Commerzbank in Frankfurt.

Although the market swoon amounted to an unwelcome return to the turmoil that preceded the bailout package, Zach Pandl, an economist at Nomura Securities in New York, emphasized that Friday’s decline was different in that it did not involve a big sell-off in government bonds.

Interest rates on bonds in Greece, Spain, Portugal and other countries had risen sharply in recent weeks as investors feared governments might default on their debts. The rescue package appears to have quieted those fears somewhat. But now investors seem to be worried about a slowdown in growth caused by governments cutting back spending.

On Friday, finance officials from the Group of 7 nations, including the United States Treasury secretary, Timothy F. Geithner, met by conference call to discuss the continuing market turmoil. They did not comment publicly afterward, however.

The uneasy mood in the markets was not helped by remarks by Paul A. Volcker, the former chairman of the Federal Reserve and now an adviser to the Obama administration, who in a speech in London on Thursday raised the possibility of a “potential disintegration of the euro.”

There are also indications that the rescue deal has worsened tensions among the European capitals.

El País, the Spanish newspaper, reported Friday that President Nicolas Sarkozy of France had pressured Angela Merkel, the German chancellor, to back the rescue effort, pounding his fist and saying France would leave the common currency without Germany’s support.

At a news conference in Zagreb, the French finance minister, Christine Lagarde, described the El País report as “rubbish.”

But with rumors like that swirling through markets, investors were saddled with uncertainty, a sure prescription for selling.